How Groupon Handles Copycats Overseas

All Over the Map In the two years since its founding, Groupon has seen its business model copied by companies in about 50 countries (we marked them with red pins). But Groupon has a new strategy to broaden its global dominion (shown on the green areas of the map).

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In its quest to become the global powerhouse of online daily deals, Chicago-based Groupon has learned a few things in the two years since its launch. Germans really dig package deals. An offer that's popular in Tennessee may fall flat in California. And people across the world invariably go crazy for sushi and hair-removal coupons.

The quickly growing start-up -- which some estimate will soon exceed $400 million in annual sales -- has also discovered a slightly more painful truth: that its lucrative business model will continue to attract a formidable army of skilled copycats as long as there is money to be made.

For those who haven't discovered Groupon, the company offers a single online deal each day in each of its many local markets -- $50 worth of yoga lessons for $25, for example. If enough people purchase the coupon, the deal is "on," and customers have a limited window of time in which to get the offer. Groupon then typically splits the proceeds of the deal 50-50 with the merchant.

Because the concept is so easy for consumers and local business owners to grasp, it has also been ripped off perhaps more than any other online service in the brief history of the Web. Thousands of Groupon clones have sprung to life in markets stretching from Latin America to China. And so far, the company hasn't done much to stop them.

Instead, Groupon has embarked on a globalization strategy, fueled by a $135 million round of venture funding in April, that involves buying out some of the company's more formidable international competitors. The idea is to swoop in and snatch up the copycats that have done the hard work of establishing a local following. "We're building by partnering," says Groupon president and COO Rob Solomon.

In May, Groupon spent an undisclosed sum to purchase Berlin-based CityDeal, Groupon's most robust European clone. The acquisition immediately added 600 employees to Groupon's 300 and gave Groupon access to 80 new markets in 16 countries, including the United Kingdom, Germany, and France.

Latin Growth In June, Groupon entered Latin America, buying one of its imitators in Chile.

A month later, in June, Groupon bought another copycat competitor in Chile, while simultaneously launching a daily-deal service in Brazil. In August, Groupon bought clone sites in Russia and Japan. All told, Groupon more than quadrupled both its employee count and the number of cities it serves in the span of about four months. Groupon now has a presence in nearly 30 countries and 15 million subscribers worldwide. "We think there will be lots of consolidation in a very short amount of time, and we want to be the 8,000-pound gorilla in that space," says Solomon.

He ignores most of Groupon's international rivals and instead concentrates on buying the ones that are strategically placed and already performing well. "The best way to combat a copycat is to do things right," says Solomon, who estimates that the group-discount market could be worth $1 trillion worldwide. "When we go into a market, this strategy allows us to quickly become the biggest player."

Groupon's globalization strategy won't work for every business, but such early and aggressive moves to expand typify a larger trend among new companies that are looking beyond domestic markets from the get-go. Global ambitions have been especially heightened as businesses continue to work their way out of the recession, says Zia Daniell Wigder, a senior analyst at Forrester Research who focuses on international e-commerce. "Businesses are wanting to diversify, and one big way to do that is by going global," Wigder says.

Going East In August, Groupon bought copycat sites in Russia and Japan.

But replicating a popular U.S. brand for another country requires understanding countless cultural nuances and local preferences. For example, Chinese consumers go for busy, flashy Web designs, while Germans demand clean lines and lots of white space.

And therein lies the heart of Groupon's strategy: Buy the clones that are best positioned to master such regional tastes and cultivate relationships with local merchants -- and then introduce best practices developed by Groupon's leadership in Chicago. "The strategy is to find the best local teams," says Kevin Efrusy, a Groupon board member and partner at the venture capital firm Accel Partners, which invested in the company last year. "Then give them the tools they need to be successful."

Groupon insiders acknowledge that there are risks to its buy-the-best-clone approach. "What if you don't pick the one that becomes the dominant player in the market?" Efrusy says. "If that happens, then maybe you're precluded from buying the one that does become dominant, either because you can't afford it or maybe there's bad blood that's developed as a result of competing against each other."

China Boom Groupon has yet to expand into China, where about 1,000 clones have already sprung up.

Still, Efrusy is convinced that Groupon is on the right track. "To see people copy you is difficult to adjust to," he says. "But Groupon immediately looked at it as an opportunity. You could pick the best that's out there and save a lot of time."

So far, the plan seems to be working, says Solomon. "The growth has been spectacular," he says. But even with the company's recent funding, there may be limits to how many international competitors Groupon can afford to buy in the near future, much less absorb into its own culture. And yet the company hasn't dipped even a toe into two of the biggest markets in which Groupon clones are operating: India and China. One report from a Chinese marketing journal estimates there are already 1,000 Groupon-like businesses in that country alone, including an exact replica that uses groupon.cn as its Web address.

But Solomon doesn't seem worried about competitors gaining a significant foothold in these markets. "There are a few more places we want to get to," he says coolly. "It's just a matter of time."

For more on how to enter global markets, including tips on hiring overseas salespeople, reviews of translation services, and in-depth guides to doing business in cities such as London, Shanghai, Beijing, and Hong Kong, go to www.inc.com/entering-global-markets.